Buyers from a wide range of industries capitalize on consumer appetite for Muscle Milk, Slim-Fast, Soylent and other nutrition supplements

In the latest U.S. fitness craze, consumers are gobbling up vitamins, minerals and supplements (VMS), and dealmakers are capitalizing on the trend. While it may be tempting to dismiss the product category as a fad, corporations and private equity investors seem to be in it for the long haul. One of the most notable recent transactions is the announcement by Hormel Foods Corp. (NYSE: HRL) to buy CytoSport Holdings Inc., the maker of protein drink Muscle Milk, from TSG Consumer Partners for $450 million.

"Ultimately, it's the consumer that is driving the demand, and consumers are looking for healthier options," says TSG Consumer Partners managing director Brian Krumrei (pictured). "It's a fast growing category, and we expect that to continue."

TSG first invested in the Benicia, California-based protein brand with a minority stake in 2007. "We thought Muscle Milk was best positioned to expand to a broader consumer base," Krumrei says. The company makes ready-to-drink protein beverages, powders, bars and chews, snacks that contain carbohydrates and electrolytes. When TSG invested initially, Muscle Milk was sold primarily through specialty channels, including gyms and nutrition stores, such as GNC (NYSE: GNC) and Vitamin Shoppe (NYSE: VSI). The private equity firm expanded the product into the broader market, placing it with grocery stores, convenience stores and mass-market stores, including Target (NYSE: TGT) and Walmart (NYSE: WMT), as well as wholesalers, including Costco (Nasdaq: COST).

Muscle Milk is also now available in Australia, Germany, the U.K., Canada and Mexico. "Consumers are looking for convenient sources of protein in their diets, and a product like Muscle Milk provides something that's convenient in a ready-to-drink or powder format," Krumrei says.

The move could also be an attempt by Hormel to "distance themselves from the Spam brand, which is probably as unhealthy as you can get," says Laura Nolan (pictured), a vice president at Little Rock, Arkansas-based investment bank Stephens.

"There is more awareness from the broader investment community of these businesses as consumer demand has continued to drive the industry," says Daniel Penn, a principal at New York private equity firm MidOcean Partners.

"It's undeniable that healthy living is more than a trend; it's a lifestyle that is sweeping the nation," Nolan says. The movement started on the West Coast, is jumping to the East Coast, and will likely filter into the central regions of the U.S., according to Nolan.

"If you don't have a healthy diet, VMS isn't going to fix your life, but there are clear benefits," says Nolan.

"People see taking vitamins as a good way of preserving their health and bodies for the long term," says Gareth Iley, partner at London-based investment bank Clearwater International. A shift away from healthier living is unlikely, according to Iley. "I can't see anything in the market that says we're going to prefer an unhealthy lifestyle."

The VMS industry is expected to grow to an estimated $56 billion in 2020 from $32 billion in 2012, which implies 7 percent compounded annual growth, according to Nolan. "The use of supplements is now much more understood and more acceptable," Iley says. "Sports supplements were for heavy-weightlifting, bodybuilding-type people, and now they're used by the triathlete, runner or cyclist to perform well and recover quickly - that just means you're opening up a wider market to these products."

There have been many deals in the space recently, both from private equity firms and larger strategic buyers.

Alphaeon Corp. announced the purchase of Physician Recommended Nutriceuticals (PRN) in late July. PRN, headquartered in Plymouth Meeting, Pennsylvania, develops specialty omega-3 pills and liquid supplements - including Dry Eye Omega Benefits - that are designed to help people who have dry eyes or macular degeneration. The deal is worth up to $55 million. Alphaeon is a subsidiary of Strathspey Crown Holdings LLC, a Newport Beach, California, private equity firm that partners with health care specialists. The buyer focuses on lifestyle health-care-related products, and it owns Teoxane Cosmeceuticals, a line of cosmetic-pharmaceutical products that claim to have anti-aging and skin-soothing qualities.

Unilever announced in early 2014 that it was looking into selling Slim-Fast, along with its Ragu and Bertolli pasta sauce business. The seller retains a minority stake in the brand.

Kainos already owned a group of health and wellness companies when it bought Slim-Fast, including whey protein manufacturer Milk Specialties Global, nutritional supplement group InterHealth Nutraceuticals and supplements company Healthy Delights. Healthy Delights CEO Chris Tisi is also now CEO of Slim-Fast.

Slim-Fast already has solid brand awareness in the weight-management category, and Kainos and Tisi plan to provide marketing support and product innovation, Tisi said in a written statement.

Kainos has been very active in the supplements sector. In February, it picked up InterHealth Nutraceuticals, which makes ingredients used in nutritional products, including herbal extracts and minerals. Kainos bought Milk Specialties in March 2013.

In April, private equity firm Argos Soditic bought the natural food supplements company Natural Distribution Group for an undisclosed amount. The Ashford, England-based target develops and distributes organic food supplements in pharmacies and specialist shops. Argos Soditic, which has offices in Paris, Milan and Geneva, plans to help the company branch out into new markets.

Cereal maker Post Holdings Inc. (NYSE: POST) in August 2013 agreed to acquire Premier Nutrition Corp., which makes Joint Juice-brand products, in a $180 million deal. Emeryville, California-based Premier Nutrition markets and distributes both protein beverages, under the Premier Protein brand, and nutritional supplements, under the Joint Juice Brand. The transaction gives Post, which is known for cereal brands Pebbles and Honeycombs, a platform in the nutrition and supplements space.

The largest U.S. supermarket chain, the Kroger Co. (NYSE: KR), said in July that it would buy Vitacost.com Inc. (Nasdaq: VITC) in a $280 million deal. Vitacost sells more than 45,000 products online, including vitamins, minerals, herbs, supplements, sports nutrition products and natural and organic foods. The deal also helps to expand Kroger's e-commerce capabilities and allows the supermarket giant access to the 16 states where it does not have supermarkets or other retail operations. Kroger owns Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's brand stores, in addition to convenience stores, jewelry stores, supermarket fuel centers and processing plants.

Kroger has "put a lot of muscle behind their healthy offerings," says Nolan.

Helen of Troy Ltd. acquired online supplement retailer Healthy Directions LLC in a $195 million deal in June as a way into the vitamins and supplements market. The Bethesda, Maryland-based target sells doctor-branded vitamins, minerals and supplements online. Helen of Troy, headquartered in El Paso, Texas, focuses on consumer products, and it owns or licenses the Oxo, Honeywell, Pur, Braun, Vicks and Stinger brands. Healthy Directions was sold by funds controlled by American Securities LLC and ACI Capital Co. LLC.

"Part of the structure of the deal for us is the partnership with the executives because they are so critical to running the business," Penn says. "The business has a tremendous amount of momentum right now. I think we will look at different opportunities, whether they be organic or through acquisition, and we'll look at continuing to build out the international business."

Having an internationally sold, branded company is one of the things that has attracted the interest of strategic buyers. "If you own the brand you have customer loyalty and customer recognition," says Iley. "From the larger acquirers, there will be a focus on whether those businesses are truly international or not." Smaller brands with lower revenues are more likely to attract the attention of private equity investors, who could build up a company and then sell it to a strategic buyer, says Iley.

The company now has manufacturing, packaging and distribution capacities on the West and East coasts of the U.S. The deal also provides International Vitamin with a way to expand distribution channels and products for both companies, the company said in a statement.

Church & Dwight Co. Inc. (NYSE: CHD) in August 2012, agreed to buy vitamin maker Avid Health Inc. for $650 million in cash. Avid Health owned the company that makes Vitafusion vitamins for adults and L'il Critters vitamins for children.

Potential targets in the sector include: Los Angeles-based Natrol Inc., which makes vitamins, minerals, supplements, weight management supplements, sports nutrition products and supplements for hair, skin and nail health; MHP, a West Caldwell, New Jersey-based developer of supplements, including protein, pre- and post-workout supplements, and other types of vitamins; PureFormulas, an online retailer of nutritional supplements and other products headquartered Medley, Florida; and Isopure Co. LLC, a Hauppauge, New York-based maker of whey protein powders and drinks.

One factor that can harm companies in the VMS sector is the public perception of how effective supplements are, which is affected by media attention on the efficacy of nutritional supplements.

It can take roughly 12 to 18 months for VMS groups to recover when a series of VMS efficacy-doubting articles are published, according to Nolan.

"From a buyer's perspective, it could make sense to try to be opportunistic about having an impact on performance and play hard at consolidating when people are still trying to pick themselves back up from those pressures," Nolan says.

The VMS industry is not without its share of negative news. Herbalife Ltd. (HLF), which makes weight-loss shakes and nutritional supplements sold by individuals, has been fighting a two-year attack by billionaire hedge-fund manager Bill Ackman, who says the company is an illegal pyramid scheme. While the U.S. Federal Trade Commission is investigating Herbalife's practices, the multilevel marketer's shares have gained under the attack, surging 25 percent July 22 after Ackman publicly detailed new allegations. Herbalife has repeatedly denied being a pyramid scheme.

Despite some negative press, M&A activity in the VMS space continues at a rapid clip, influenced by several factors, including industry fragmentation, the debt markets and an increasingly favorable environment for sellers.

"You have seen a relatively fragmented market start to become consolidated, and now you have a handful of strategic buyers that have been active in the category, Hormel being one," Krumrei says.

There appears to be no shortage of newcomers to the VMS market. One of the more high-profile startups is Soylent Corp., which makes a dry mixture of carbohydrates, amino acids, proteins and vitamins designed to replace meals.

Entrepreneur Rob Rhinehart recently made the round of late-night talk shows touting his product, which he named for the classic dystopian sci-fi flick, "Soylent Green."

Rhinehart claims to have consumed nothing but Soylent for 30 days. The mix has gained a following among the too-busy-to-eat-let-alone-cook software programmers in Silicon Valley, and the company has raised about $2 million from venture capital firms Andreessen Horowitz and Lerer Ventures.

"There are a lot of entrepreneurial companies," says Penn. "There is a lot of innovation around supporting that active-lifestyle consumer."

This idea extends not just to VMS companies, but also to snack makers and consumer goods companies as well, which are increasingly focused on offerings for people who are focused on living healthy, active lifestyles.

Fragmentation in the VMS space will lead to continued consolidation. There are many small VMS groups with brands that are sold through oodles of retail outlets, including specialty online distribution platforms. The spectrum of distribution channels is one of the factors that leads to fragmentation, says Nolan.

"From a retail channel perspective, it feels like consumers are trying to limit the amount of stops they have to make," Nolan says. "Convenience is definitely going to push channel consolidation."

For online retailers, which compete on prices on branded supplements, their main asset is their customer file. Brick and mortar retailers are also selling VMS products because of consumer demand. "The retailers in the space are expanding their segments to support that consumer," Penn says.

Lending markets are also helping buyers push a burst of M&A activity in the VMS space. The markets, as well as the capital that both strategic buyers and PE firms have on hand, are contributing to auctions that experts agree are very competitive.

Buyers are looking at the easy availability of financing and their ability to access the debt financing markets and using those options to help them pay more for assets.

Before Helen of Troy closed the deal for Healthy Directions, the company amended its loan with Bank of America NA and other lenders to increase its unsecured revolving credit facility to $570 million from $375 million, which allowed it to make the Healthy Directions acquisition, the company said.

Private equity groups are "very competitive in terms of trying to put their capital to work, and that drives up valuation and drives down the burden on a seller in terms of considering a sale," Nolan says.

"Specific to strategic buyers, they have pretty nice war chests across the board ... there's a lot of cash on the collective strategic balance sheet which is helping fund better valuations."

The Helen of Troy acquisition of online supplements retailer Healthy Directions, for example, worked out to a bit less than 8 times adjusted Ebtida, Helen of Troy said in a company statement.

The availability of capital and strong valuations means that now is a good time to sell. "We're in one of the best seller's markets," says Nolan.

"The public equity markets are trading at very attractive valuations, so strategic buyers in food and beverage are able to use their current valuations to go out and acquire businesses that are immediately accretive or accretive in a short period of time, and the competition among those strategic buyers is driving up multiples," Krumrei says.